2024: Skeptics Guide to the Second Half

What can we expect of markets in the second half of 2024?  Can AI sustain its explosive momentum, or are we on the brink of a bubble burst? This week on Skeptic's Guide to Investing, we dissect the meteoric rise of AI, focusing on NVIDIA’s dominance and the broader implications for investors navigating this tech frenzy. We’ll guide you through the landscape of AI-related investments, from the behemoths like Google and Microsoft to the higher-risk, ancillary players. Discover why some investors are choosing secondary beneficiaries to sidestep the volatility of direct AI stocks and what this strategy could mean for your portfolio.

As AI mania captures headlines, what about the rest of the market? We unpack the media-driven enthusiasm that's shaping financial trends and debate whether AI stocks will continue to hog the spotlight. Learn the importance of portfolio rebalancing to sustain a healthy investment strategy amidst the hype and gain insights into other potential opportunities waiting in the wings. Our analysis takes into account the broader economic environment and the health of various sectors, providing a holistic view of where the market could be headed in the second half of 2024.

Navigating the intricate web of global politics and its economic repercussions, we delve into the conflicts in Ukraine and Gaza, the role of the Federal Reserve, and the looming U.S. elections. From geopolitical tensions to the potential impact of Trump and Biden on market stability, understand the complex interplay of political events with economic decisions. We'll also explore the wild card scenarios, like the hypothetical collapse of Russia, and how these could reshape global stability and investment strategies. Tune in for a thorough examination of how to strategically position your investments amidst these evolving global dynamics.

Straight Talk for All - Nonsense for None


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Transcript

Steve Davenport: 0:26

Welcome everyone to Skeptic's Guide to Investing. Today we thought we would take a mid-year break and just kind of start to think about okay, we've had the first half of 2024. What do we see as the issues and the current issues that will proceed into the second half of 2024 and what could be more or less important? And then at the end we'll ask what issue is the media not talking about that? Maybe it should be as we look ahead to the second half of 2024.

Steve Davenport: 1:01

So, if I look at the first half, it was dominated by two letters AI, it was AI, it was AI and then it was a little bit of dessert, with AI on the side. It seemed like the media couldn't figure out that there was anything else going on in the world than the purchase of high-speed chips from NVIDIA, and the media helped NVIDIA towards I think it's 175% rise since the beginning of the year and it's really just been a crazy ride. I would say I understand that it's a new area and I understand there's new prospects. But I guess, C lem, I'd ask you, is there any way that this continues to dominate the second half of 24 the way AI has dominated the first half?

Clem Miller: 2:00

I certainly think so 175% more for NVIDIA. I didn't say that I don't think there's going to be a giant protracted pullback. It had some bit of a pullback in the last week, but 1.4% short interest ratio is not something you would see with a company that's going to see a huge reversal, I think in the Can.

Steve Davenport: 2:55

I just stop you there for a minute, Clem. Yeah, what number. If it started to creep up and it got to two, then it got to two and a half. Is there a number in your analysis that says, once you get over here, you're starting to be something that I need to worry about?

Clem Miller: 3:13

Two, two and a half, two and a half, yeah, and you know what, I don't want anybody to think that that's like a terrible number. That's actually a pretty decent number. It's just that I'm being pretty conservative Now I will do higher than two, two and a half, but it's got to have other elements that look good too. I would say that truly worrisome is above five and devastatingly worrisome is above like meme stock type. Worrisome is like 8% to 10%. If that puts a oh, that's very helpful, yeah. So, yeah, I mean NVIDIA. I just don't see that having a giant pullback.

Clem Miller: 4:04

I think part of what we need to think about when we talk about AI is I think there's three types of companies in this space. One type are the companies that have kind of a monopoly position NVIDIA still does. And then when you talk about, know, nvidia is basically a design company. Uh, you talk about the companies that, uh, you know that makes its chips, which is a tsmc in taiwan, you know, which obviously has its own geopolitical issues, uh, asml, which makes the laser lithography equipment in the, the netherlands. I think those are very solid companies. Monopolies, I think you've got the the uh, ai type. I'm talking about companies that are integrating ai into their systems and, uh know, so those would be the typical. You know Google, microsoft, you know now Apple is starting to go down that road. So I think those companies are, you know, very strong companies, monopolies in their areas. You know those are developing AI, those are developing AI. I don't think we have to worry about those.

Clem Miller: 5:31

Where I would be skeptical is you know anything that that purports to be AI oriented. I mean, you know you hear this talk about picks and shovels and all that kind of stuff. Anything that purports to be AI oriented I think you got to be very careful about. So, for example, I'll give you one theme that I see out there You've got. Obviously, data centers are important for AI, no question about that. But people are talking a lot about providing power to the data centers as sort of a sort of indirect way of being able to play AI space. And you know, the question is is that one step removed, two steps removed? Is that really an AI play? I can't really say that it is, and you know it's almost like it's got a data of what point.

Steve Davenport: 6:31

I mean utilities returns versus AI returns. I mean, what are you going to pick up? You know the utility is going to go from a three and a half percent to a four and a half percent.

Clem Miller: 6:46

Yeah, I mean, I'll tell you, there's one name, that I held for a long time and then it's short interest ratio just went out, you know, just went much higher than what I'm comfortable with, and that's Vistra . So I wouldn't, you know, if you want to take a look at that, take a look at it had sort of geometric uh returns, uh, for a while and then it started to uh, to get a little unstable, and so that's when I um, that's when I sold uh, to sort of lock in those cumulative returns. I probably gave up some more upside, but that's when you know, that's when you know, that's when I sold. So, I just think one has to be careful about these ancillary industries or ancillary type companies, and not not put too much emphasis on, you know, on those, you know, relative to those companies that have established monopoly positions.

Steve Davenport: 7:51

Some people are trying to find stuff that doesn't have the downside volatility but has some potential extra growth from AI-related activities. So they want to own NVIDIA, but they just can't stomach the ratios right. They just can't stomach the ratios right. And if they?

Steve Davenport: 8:09

can't then they say okay, let me look at, you know, energy companies or other companies that are going to be a secondary beneficiary, because I can take that they have all these assets in their balance sheets and their multiples are much lower. So this allows me to say I'm in the AI space, but I'm really not in a space that has a you know, like you said, more of a geometric you know some of these utilities I'm talking about, you know kind of bigger utilities, not ones that people haven't heard about.

Clem Miller: 8:44

You know they have a lot of other business besides AI. That's sort of an incremental business. You know they have a lot of other business besides AI. That's sort of an incremental business and that's what leads to their, to their, you know, lower earnings growth, lower revenue growth, lower profitability and, of course, lower valuations because of all that. So I mean, I don't, you know, I don't look at valuations by themselves, I look at the whole picture, and that's why I don't really see utilities in general as being all that attractive. Obviously, I see why people are kind of attracted to the idea of being invested in those utilities that are pursuing relationships with data centers, but I wouldn't count on that being a real way of getting into AI space and profiting from it.

Steve Davenport: 10:00

I agree, I think people are, and I don't mean to put any shade on anyone who is out there trying to report in the financial markets but it feels to me a little bit like this first half.

Steve Davenport: 10:08

We lack stories and when there's a lack of story, there's a lack of things to talk about, there's a lack of things for people to get interested, investors to really follow them online.

Steve Davenport: 10:21

So in my mind and Clem, you can tell me if I'm being too skeptical here I feel like AI was a great story that everybody just keep playing and it has real legs and it has real reasons to succeed.

Steve Davenport: 10:38

But to dominate 80% of the news coverage in financial space for this first half of the year, I think is just ridiculous and I think that we focused on it and we focused on it and we focused on it some more. And it feels to me as much like there's a lack of other stories and what I see happening is the second half of the year. There's going to be this big story in November and you're going to see the coverage and the interest in AI kind of dwindle Because one you've had already 175% move in NVIDIA and a lot of these names have had tremendous runs and they're not going to give it all back, but they are going to not be the center of attention, and if you're not the center of attention, there's less volume. There's less volume, there's probably less upside. I mean, is it possible that we jump from story to story and the relevance of the story isn't always the relevance to the economics or the earnings?

Clem Miller: 11:44

Absolutely. I think that's part of the problem of relying on CNBC and the media, because they do jump from story to story and they get people excited or they get people worried. The last few days a lot of folks were really, really worried about NVIDIA and they brought up stories from the past about Cisco and so on and so forth and I bet you a lot of people sold at the recent bottom for NVIDIA when the smartest thing to do would have been to stay in.

Steve Davenport: 12:26

No, I thought there was going to be a boost after it split.

Steve Davenport: 12:29

There was, there was a nice kick and now we're back to kind of the split level.

Steve Davenport: 12:35

So I think the people who came in for that split and they may have gotten out during this time, or they just got in at the split level and I think now they're in a position where they have to think about it because they're going to say okay, I didn't take advantage of that short-term bump, am I really a long-term investor?

Steve Davenport: 13:01

And I guess I mean, I think that's something that everyone has to ask when they start to get a position that's challenged right Is do I really believe long-term that at the price I purchased, this is something that I want, all yeah, and I believe for NVIDIA, because their earnings are falling right up and the revenues are looking great that yes, I think there is reason to still own it and have a large position in it because it is the representation of the space. But I guess the original question was is AI going to dominate the second half of 24? And my comment would be I don't think it could possibly dominate the way it did. So I think AI takes a step back from being 70% of the news coverage to being 20 to 30.

Clem Miller: 13:47

Really that low? Yeah, no, I get the argument you're making that the news drives volume, volume drives prices and, as a result, share prices might fall back for AI stocks.

Steve Davenport: 14:07

You're talking catastrophic. I'm not saying anything. Yeah, the line would be changed. I'm just saying that there's. I mean I believe we run over some average return line. That's a quadratic equation yeah and it looks and feels like, hey, this average return over time. But we go through periods where this average return over time. But we go through periods where the average return is going to be negative because it gets overpriced and we go through periods where it's going to be very positive because it's underpriced.

Clem Miller: 14:41

Hopefully we still have an audience after you use the term quadratic equation. I don't know.

Steve Davenport: 14:50

I was going to talk about the variables and probably had too much coffee this morning steve um, yeah, I mean.

Clem Miller: 14:58

the question then becomes like if you, if you decide, if you decide to maybe pull a little bit out of nvidia, um, and some of the other magnificent seven companies, the question is, where do you put that? Do you put it in cash? Do you spread it around other stocks? I mean, what do you do with it?

Steve Davenport: 15:22

Yeah, I mean, we just had this discussion with my partner and we've had we're, we've had ai, we've had nvidia, and it's done very well. And the question is, do we want to? We're going to rebalance because the rebalancer is going to take a little bit off I'm not going to take a lot off, but it's going to take some off because the performance has been extraordinary and the question is do we think this time is different and we want to have it rebalance less of the nvidia and keep more of the nvidia in a position that's above, above average? And it's a tough question because it is truly a unique stock and there have been unique stocks before, like cisco and like others, and so the the decision we're kind of coming up with is to let the discipline of a rebalancing do its work and it'll find the other names that we think are, you know, going to be good prospects. We don't own things that we think are bad prospects. So, yeah, I think it will find space in the portfolio where there are better opportunities.

Steve Davenport: 16:30

I mean, it's not clear to me that the rest of the economy is not also doing well and also has opportunities. And so if the target price for NVIDIA is $130 or you know, tells you how much you should be in it or out of it, based on what you feel is going to happen, and there are some stocks that are still selling at 60, 70 percent of their target. So I believe that there are things that can succeed in this environment. So I think you've got to give them a chance and it's not an all or nothing. Yeah, okay, and the second thing for the second half I'm looking at is what do we think of the fervor, the energy, the interest in obesity drugs? We talked about them on a podcast a while ago. Do we think that that is a continuing story that's going to dominate the second half of 24? Is the story starting to drop away? Is it not important anymore? How are you feeling about the obesity drug, lily Novo kind of question?

Clem Miller: 18:22

I think it continues to at. Again, if you look at the short ratios, short interest ratios for Lilly and Novo Nordisk, they're both quite low, so that's good. Their valuations are not unattractive. I think that the expected growth for both is pretty strong. And again, when I, you know, when I use those terms, I'm using them in a relative fashion, relative to other stocks you might look at. So, you know, I think this is a, you know you can call it a theme. It is a theme, right, and I think this, I think the these two companies will continue to dominate that area into it. But I think those two are established and I think that, you know, given, given the way the world eats right, I think, overeats, okay, I think I think they will continue to have a, you know, a role in our, you know, know, extended health care system.

Steve Davenport: 19:47

I really do, I agree, I think that the world isn't solving their problem with weight. It's it's kind of putting a band-aid on it and some of it will lead to better results for people who can take that advantage of the drug gives them to get to a certain weight and then run with it literally, or walk at least 30 minutes a day with it. Um, but I I kind of look at it as it's. It's going to expand because I think that the secondary players are going to start to become bigger players and so, as much as it's been a novo and lily story, I think it's going to start to expand out into Angen and Pfizer and some others.

Steve Davenport: 20:28

Just like you say that some of the AI stocks have all claimed some orientation or association with AI, I think everybody's going to want to talk about addressing the obesity issue around the world and I think it's going to be a story. I just think the story is going to be more about a broadening than it is about just those two, because I think they've had their their time in the light and I think, uh, like everything else, um, every, every dog has his day every. Um, it's, it's gonna, it's gonna widen out, because I think it's more than just those two, and I think the problem is much longer and much deeper and I think there'll be all kinds of you know how do we combine the drug with something else in terms of counseling to come up with a holistic solution? Because I think that just the drug is not a solution. The drug is one step and one piece of the process.

Clem Miller: 21:27

Yeah, absolutely, and I do think that you know, if you think about a portfolio approach, you know it's really good to have both the obesity drugs and AI in the same portfolio because it removes you know there's some offsets in terms of the risks involved. Right, the risks to the obesity drugs are different than the risks to the to the AI stocks.

Steve Davenport: 21:57

I think it's a good theme. I think we talked about it. I think it's. I feel better for understanding a little more about the. You know what it's doing with the peptides and I I think it's a very exciting space.

Steve Davenport: 22:10

But I just say that, is the second half going to be as dominant as the first half? My answer would probably be no and I think we all I think we will, at the end of this, hopefully agree that this election and the elections around the world are going to dominate the second half in terms of information flow and therefore perhaps some equity dollar flow. So the next item we've talked about in the first half, which has been Europe and the impact of the Ukraine and the efforts there and how it affects their energy sources and how it affects everything in the European space, especially the political, how do we think Europe and the elections and the Ukraine as an issue is going to dominate the second half versus the first half? Is it gonna get more pronounced? It sounds like some of these battles are getting more serious and there is definitely a feeling that this people could be trying to set up their lines for, ultimately, a ceasefire in some type of a negotiation.

Clem Miller: 23:23

So I think it's hard to have a crystal ball about what's going on with ukraine and russia. You know you had a long period of time, starting last year, where ukraine, after some advances, has basically been stuck, and then, more recently, russia has made some advances and you know Ukraine has pulled back some, but that was before they got some of the more sophisticated US and and other uh to be able to be used. Um, now that's the ground war. Uh, there's a a very sophisticated air campaign that ukraine is waging, as is russia, uh, against the other side. I mean, you got, you got russia, you know, trying to destroy the energy infrastructure of Ukraine. You've got Ukraine trying to destroy military targets within Russia and having some spectacular success in destroying ships on the black Russian ships on the Black Sea facilities, russian facilities in Crimea and so forth. So you know you've got a lot of military successes and failures on both sides. I think that you know.

Clem Miller: 24:58

I think that eventually, my prediction is that eventually you're going to see more Western military advisors on the ground in Ukraine. I think it could be. You know, by saying by advisors, I mean you know sort of contractors and you know if you, if you think about it. You know, contractors were used, uh, to a degree in iraq. They were used to a degree in vietnam. I I think that I think that we I don't think we're going to see actual military on the ground us military and european military on the ground in ukraine, but I do think we will see some contractors, uh there to maintain and help out with some of the equipment there. They're going to maintain it. They're not necessarily going to pull the trigger.

Steve Davenport: 25:56

Is there more of a commitment in terms of money and resources but not necessarily a commitment in terms of news and information flow? Of news and information flow, uh, you mean coming out of mean disinformation? Yeah, I guess I'm saying is that some people would look at that as a distinction without a difference. If you're putting more people in in danger, it's you know, it's a more dangerous situation. And if we're going to say that things in the Ukraine are going to get more involved, less involved or stay about the same, I guess we're saying that we think they're going to be more involved in the Ukraine.

Clem Miller: 26:41

That's what I think. I think there's going to, I think there's yeah.

Steve Davenport: 26:45

Then we look at Gaza and I can't really figure out where the story of Netanyahu begins and ends and where the story of this Gaza event come together right is. I saw recently that some parts of the Israeli government are asking that these ultra-conservative groups be drafted that have religious reasons for not fighting about being aggressive in Gaza, but then not providing any troops from their population is really in a position where they're starting to upset the rest of the government and starting to make Netanyahu less stable in his current position, and if he becomes less stable, does he become more aggressive? So will Gaza get to be a bigger story in the second half, the same or it will decline because it will start to drift away as we focus on other things.

Clem Miller: 27:59

I think Gaza will be a less important story going forward, story going forward, but it's going to be less important because Hezbollah in Lebanon is going to be more important. And I think that it's fair to say that in the Gaza conflict, you can't measure success by the number of people you've killed, whether it be civilians or soldiers or terrorists on the ground. I think success is whether you've achieved your objectives and you know, getting rid of hamas and bringing the hostages back to into israel, uh, were you know the, the, the noble objectives of netanyahu, and he's failed in both and he failed also keeping I also failed setting the goal of elimination of a group yeah, it's an idea israel is completely off the rails in terms of odds, a country that's based on the idea that they want.

Steve Davenport: 29:11

You know, they were mistreated in world war ii, they've been mistreated through history and we're going to say that now that you have arrived and you have, you're going to say we're going to eliminate this other group. It's really a very difficult kind of goal to achieve, not just because it's you know, 100% we're going to eliminate 100% of Hamas's presence in Gaza. It's not reasonable, it's not acceptable. 100% we're going to eliminate 100% of Hamas's presence in Gaza. It's not reasonable, it's not acceptable. As a way to you know, when you say about success in war, that brings up a topic that we could probably spend a couple of hours on right.

Clem Miller: 29:54

Yeah, I mean, I used to think that there was a solution to the Gaza situation which was to use a tactic, that a situation that negotiated into the Israeli-Lebanon PLO conflict back in the 80s, where Israel or the PLO agreed to be shipped out to Tunisia and operate in Tunisia, well far away from Israel. I used to think, wow, you could apply that in Gaza and have Israel and Hamas agree to the Hamas leadership and fighters being shipped to I don't know some other place. Right, I used to think that. But you know, hamas dug itself in and its leadership is has no intention of of leaving. I think that's. I think that's because they're more extremist in their religious views than the plo ever was and certainly more than what the palestinian, today's palestinian authority is. So it's kind things down to money.

Clem Miller: 31:25

Yeah, you know that seems like a gross mischaracterization, but if I look at things and I say iran keeps, you know, and wants this effort to continue, you know, israel can try as they might, there there's just too many um areas and the borders and too many things that they can do in terms of getting other groups involved, like yeah from a, from a strategic perspective, both from the iranian standpoint and the israeli standpoint, hezbollah is much more important than Hamas is like much more. They've got much more sophisticated weaponry. They've got more weaponry If that already they're in a conflict, you know, kind of a low level conflict. If that thing gets worse, which you know, I actually think there's a pretty high probability of that getting worse, right.

Steve Davenport: 32:23

Let me sum up. If I think Gaza has an issue in itself, maybe the same or less in the second half, but the overall area of the Middle East could become more of an issue in the second half. Yes, is that a fair conclusion? Yes, okay, so now we're going to take a ride over onto the other side of the world. And what do we think about Asia and what's happening, with the US kind of getting together with Japan and Australia and China continuing to threaten and China continuing to deal with its own economic issues in terms of real estate? Are the issues in Asia going to be the same, greater or less than there were in the first half, as the US gets derailed or maybe clarifies its positions with the election and the other things going on in the US? How does China and Taiwan factor into your portfolio going forward in the second half?

Clem Miller: 33:34

So I do not own. I mean, if this is any indicator, I do not own Taiwan Semiconductor in my portfolio, so I see not that it's not a great company. It's a great company it's got a monopoly. No, but I guess I'm saying that's where you were today.

Steve Davenport: 33:51

In the future, do you see yourself turning that around and saying I think this thing with China has dissipated and I think it's time for me to?

Clem Miller: 33:57

own Taiwan again. No thing with china has dissipated, and I think it's time for me to own taiwan again. No, I think the uh, I think the the chiwa, tai chi chi. One china us conflict, uh is, uh is one that is going to uh get incrementally worse from year to year to year. Uh, I don't, I don't think, I don't think there's anything magical about the second half of 2024.

Steve Davenport: 34:22

Well, the way I look at it, clem, is that we are as a country and we politically and you can call me cynical if you like, but I believe we have an attention span of slightly more than a net span of slightly more than a net. So in the second half, if everything starts about Trump, trump, biden, biden, trump, biden, biden, I think our attention span dissipates and our ability to handle what's happening in some of these areas creates an opportunity for China to do something. Because we're not looking, our eyes aren't on the ball. I would say our eyes aren't on the ball most of the time. If anything distracts us, it's going to create an opportunity for China.

Clem Miller: 35:09

Is that too cynical for you? Well, I will say this that yeah, I mean there's going to be a lot of focus domestically in the second in domestically in the U? S in the second half. But what I think is fair to say is that there is, you know, there's bipartisan consensus on very little in the United States, but there is bipartisan, bipartisan consensus on China, that China is a threat, that it's a potential long-term strategic adversary of the US. I think there's a lot of support.

Steve Davenport: 35:43

I was just eliminating the production of some chips. Here I'm saying don't you think that China could be emboldened to say their eye is other places? Now's our time and we blockade Taiwan and the US's deeply engaged in Gaza and the Middle East, deeply engaged in the Ukraine, and we're not able to pivot in the middle of an election cycle and China is given a free ride for, say, six months. If, if I was asked what what thing people aren't talking about that could happen.

Clem Miller: 36:25

That's kind of my second half, you know, ultimate um off the rails type of uh prediction uh, I don't think that's going to happen, but I, I agree that it's kind of a, but I agree that it's kind of a gray swan, black swan kind of situation that we can put that in the category of things to worry about or things not things that may happen, that people aren't focusing on enough. I think we can put it in that category, um, but I, I think it's. I mean clearly, I mean from a, from a from a global economic perspective. Uh, the China, taiwan, broader East Asia political situation is, I think, you know, just as important, if not more important, than what's going on in the middle east from a global economic perspective well, I do too.

Steve Davenport: 37:23

That's why I think it's interesting that we hardly ever hear of it yeah, well, it's, it's.

Clem Miller: 37:28

You know, one reason we don't hear about it is because it's uh, it's complicated, okay, and it's people. Are you saying it's hard for the media to get down?

Steve Davenport: 37:42

to things that are only simple.

Clem Miller: 37:45

It look, it's, it's that's, you know that's. That's one of the reasons why the media focuses a lot on the middle east. Uh, because, especially the social media, because you know, it's easy to paint one side or the other, as you know, as you know, bad or good or whatnot, right, and it's when, in reality, there's shades of gray, but it's, it's easier in that situation to be starkly black or white when only some of us realize that it's, uh, there are lots of shades of gray. Once you get into the details In Asia, it becomes much more complicated because there's all these different interests at stake Japan, china, taiwan, north and South Korea, even Vietnam and the Philippines. It's complicated and I think we, as in the US, are actually taking preparations for potential conflict.

Clem Miller: 38:57

I saw just yesterday an article that suggested that the US was rebuilding airstrips on small Pacific islands that had been abandoned after World War II, and I thought that was pretty significant, that we would be building those, that we would be building those. You know those are, you know, just in case Okinawa, you know, the US bases in Okinawa and Guam are attacked. I suppose We've strengthened the relationship with the Philippines, relations, to put yourself down, yeah, so I just think. I think that, I think that you know it's a longer run thing, but I think it's. I think that it's a longer run thing, but I think that is a very significant risk of conflict between China and the United States over the next three, four, five years. I don't think it'll happen. Okay, I don't think it'll happen.

Steve Davenport: 39:56

No, if we summarize days, we would say still an important area, but in the next six months we anticipate the back and forth to ultimately keep it about the same.

Clem Miller: 40:08

Is that? Is that? Yeah, I mean there could be, you know, probing here and there, but I think that's about right, okay.

Steve Davenport: 40:17

Now we're going to get to one of my favorite topics and one of yours too Fed rate cuts. So if we look at Fed rate cuts, we've been talking about raising rates, we've been talking about lowering rates for three or four years now and all of the talk and chatter as we talked about in one of our podcasts really amounts to mostly hot air, because it ultimately the market reacts the way the market reacts, based on what they see as the true level of rates, and sometimes the Fed will adjust to the market and sometimes the market will adjust to the Fed. But they are somewhat related to each other, but not necessarily causated. And when we think about rate cuts, I see Bloomberg today with an article that says, hey, we might not have rate cuts in September because it might be influenced by not wanting to appear engaged in the election and trying to pick a winner, which I think we did a podcast on about six months ago. So I find it amazing that the mainstream media could come out with something so expected, so unbelievably kind of obvious, but they haven't talked about it.

Steve Davenport: 41:41

They've been talking about this reason for this rate cut and this reason for this rate cut and trying to get to two by the end of the year and all these imaginary gremlins that are running around and in my mind, we're done. We're not going to cut rates in the September, october, november timeframe because it would be so blatantly a move to help one side versus the other that I think it's beyond being political. It's basically saying we want to determine the result. And I look at this and say rate cuts are done. I mean if Biden wins and if they do a rate cut in December as a last ditch effort to show people that they are supportive of the US economy during this time. I think it really isn't what the market is expecting and I'm kind of amazed that the market is just now saying I wonder about the election, whether that will influence anything. So in your mind, is the next six months going to be more about rate cuts, the same gobbledygook, or is it going to dissipate a little bit and give us a break?

Clem Miller: 42:59

I don't think there are going to be rate cuts because of the political environment. I think you're right that not doing rate cuts is just of a political influence as doing rate cuts right. You know, the lack of action also has an impact. It has as much of an impact as taking an action.

Steve Davenport: 43:27

Well, I mean, let's go back when Powell was reappointed. He was delaying increasing rates, which was good for the new president, and guess what? The new president decided to reappoint him for a new term and the next meeting after that they began to raise rates. Can we honestly say that this was completely based on the economic data and not the fact that he wanted to be reappointed and he was going to do something to help the new government so that he endeared himself to them, and then, you know, he delayed doing something that was going to. I mean, this goes back and forth and back and forth for decades, right, clem?

Clem Miller: 44:11

yeah, it's. I mean, the federal reserve is, you know, is a part of the government. I know people say, you know, is a part of the government. I know people say, you know, conspiracy theorists and others say, oh, it's really controlled by the banks and not by the government. And sure, there are banks that are, you know, that are represented on the regional, you know the regional banks and so on. But it's really a government agency and as a government agency, the, you know the, the federal reserve chairman's appointed from the top and just like any other, you know, Senate confirmation and so on. And I think that you know they've tried to diminish political influence, at least on the surface, by having longer terms and whatnot. But it's still a political agency and decisions, I think, are influenced by politics and I think to sort of suggest otherwise or to ignore politics is just a little bit on the ignorance side. I think, you know, I think, yeah, I mean you know, I think it's something like 75% economics and 25% politics.

Steve Davenport: 45:31

Yeah, I think it depends on how close you are to elections. Yeah, I would say, in the general year non-election year it's maybe 75-25, but I'd say it gets close to 50-50 when you're in a you know election year.

Clem Miller: 45:45

Yeah, I think now, with a short period of time left, I think it's 50-50 and you know, another month or two it'll be 75-25. And I don't think there will be any action. It's politically safer to take no action than it is to take some action.

Steve Davenport: 46:05

Yeah, and sometimes the numbers. If you did something opposite of what the numbers are telling you I mean, and you have the minutes from all the other meetings it just would look and feel completely out of character. Yeah, so the last topic about what's going to dominate the second half is probably the one that we could have spent all of our time on, which is the election. And I guess I'd ask, when we think about Trump and Biden, we know early now what's going on. I looked at the VIX and the VIX doesn't seem to be indicating much. There is an indication that a lot of people are like Goldman and others are talking about the fact that the election won't be decided, at least for 15 days. So if you're going to get protection, you get protection into December. So I think that there's a good that could be a good call that there will be more uncertainty than people are used to, because the one thing everybody thinks is a one side will win or one side will lose. But what if there's just a, you know, a repeat of the Gore or Bush? And there is a lot of uncertainty, and I think there's going to be a lot of those people who are going to be extremely upset at the way the Supreme Court is going to have more power and I don't know if, in certain cases, we won't let it go to the courts because they'll feel that they're not going to get treated fairly.

Steve Davenport: 47:45

And you know there's to me, this is an election that has no winners. There is either side would tell you. I'm not happy about this with my candidate, I'm not happy about that with my candidate and I guess I'd say 70% of the electorate, maybe 40% on the Democratic side, and 30% of the population that's hardcore Republican, are not going to change what they're voting or how they think about it. They're going to go with what they feel is obvious and that their party has the right answer. But it usually comes down to that messy middle and that 30% in the middle that's independent or undecided or however you want to characterize them, that jumps on either side of an issue based on what's important to them, whether it's social, whether it's economic or whether it's something to do with the character of the person running. I mean, we've got two characters running and there is a lot of character we could talk about and we're going to see Thursday at the debate.

Steve Davenport: 48:53

I guess I'd ask if you thought about this in terms of what's going to affect my portfolio the most from the election. Do you think the election's impact on my portfolio will be greater than I anticipate? The same, you know, a normal amount, or somewhat less than normal, because there's so much that they both are fighting each other that there's ultimately not that much of a clear advantage to one or the other for them to impact the economic and ultimately the earnings of the companies we own. Where do you see this election in terms of impacting your portfolio, clem?

Clem Miller: 49:35

I think that both candidates are going to be bad for business in the United States. I think that both candidates are going to be bad for business in the United States. Really, yep, all business. Well.

Steve Davenport: 49:46

That was my next question, just so that you're real.

Clem Miller: 49:52

Which industries and sectors. Let me explain why I'm saying what I'm saying. Okay, so let me just say first, before I go into that, that I think it's still early, really too early, to make any kind of guesses about where this whole thing is going to end up. There's a lot of variables involved and polls at this point in time are not to be believed, are not to be believed. And if you think back to 2016, nobody expected Trump to win, and that same year, nobody expected Brexit to pass in the UK, and so I think it's impossible to know what's going on until it happens. Secondly, I would agree with you that we may not know what happens with the results until they get litigated for a few weeks after the elections, because I do think it'll be close in a number of states. So I think I agree with you on that point. It'll be close in a number of states. So I think I agree with you on that point.

Clem Miller: 51:05

Um, now, the reason why I think, uh, both candidates are bad is, uh, on the biden side, I think there's, uh, I think, even though I think we have to give biden a lot of credit for some of the policies he's had in terms of, you know sort of Keynesian policies of pumping some money into infrastructure projects and renewables and so on. I give him credit for doing that. On the other hand, I think that it's likely that we'll see some tax increases, and I think that you know there's going to be. I think there would be a rollback of some of the Trump tax decreases that you saw back in, I believe, 2017. So I think he's bad for business from a tax perspective, uh, biden, but from a Trump uh, in terms of Trump, he's not good for business either. In fact, he could be far worse for business than Biden is, because at least Biden is predictable.

Clem Miller: 52:12

I think with Trump, um, I think with Trump, what could happen is that hold on, I just had a okay. I think what happens with Trump is that he is going to have giant tariff increases. He's already talked about giant tariff increases. He's going to be much more problematic as far as politics is concerned, as far as international politics is concerned. He's going to he's just going to create a lot of chaos. You know, when he actually had a meeting with the conference board of business leaders a week or two ago and a lot of those business leaders came out of that meeting saying that it would be chaos if Trump won, and they were even talking about how, while they don't really support Biden, they think that Trump would be far worse for business. So I think there's no clear candidate who would be positive for business, unlike in past elections prior to 2016,.

Clem Miller: 53:36

I think that there were a number of elections where business could look at the candidates and say, well, this one might be slightly better than another one for business, but, you know, neither of them would be terrible, and I think in this election it's just, it's just different. Now. I think some of that's already priced in, obviously, because those are the two candidates. I think some of that's already priced in, obviously because those are the two candidates, uh, but uh, I think it could get, you know, as the election approaches, as inauguration approaches, uh, depending on what the candidates you know begin talking about, uh, depending on you know who sort of has the ear of each candidate, I think it could get worse for business and that might be a time to start becoming much more conservative.

Steve Davenport: 54:26

So maybe you will buy bonds at some point in your career here.

Clem Miller: 54:29

It could be or much more cash, much more dividend-paying stocks.

Steve Davenport: 54:37

Okay, we'll cross that bridge when we come to it.

Clem Miller: 54:39

Yeah, exactly.

Steve Davenport: 54:41

So I've kind of written down one or two things for each candidate. I mean, I think that Trump will be good for oil and defense. I think that Biden will be good for oil and defense. I think that Biden will be good for the solar industries. He'll probably be a negative for the drug industry and some of the financials.

Steve Davenport: 55:00

I think that the one thing that still kind of sits out there that we know exists but we don't know how big of an impact it is, is these third party candidates. And now we've got two or three more, with the Green Party and Libertarian Party putting out candidates and they're not Kennedy and Kennedy's continues to get on the ballot in various states, and I'm starting to think that what we thought was a strange topic six months ago is becoming stranger and stranger still. So I have this. I'm an idealist, as you probably can guess, Clem, and ideally I had this vision that the courts were going to prevent Trump from running, that Biden was going to take a medical reason to step down and focus more on his family candidates that would be elected at their conventions and those two candidates would have what I'll call a reasonable election, which would be focused on issues and ideas and abilities and we would still have chaos. I think, because I think that it's so close in the Senate, it's so close in the House that whoever gets elected still has to depend on getting majorities for it to truly so.

Steve Davenport: 56:31

In my mind, most of the time when we look at elections that are close, we say well, it's a close election, it's good for the stock market, no matter who wins, because neither one has a mandate. And I would say that the one thing we can probably say about this election is whoever wins doesn't have a mandate, and if they don't have a mandate, they probably don't have a groundswell of support one way or the other for control of both the Senate and the House. And therefore, I hate to say this, but I think that the election and it being over with could be good for the market, because it will put this behind us and let all of this discussion about Hunter and all this discussion about Trump's Stormy Daniels and just really start to talk again like adults about real issues in the economy and earnings. I mean, is that too far-fetched a scenario for you, Clem, to actually occur? Am I out of you know? Am I gone past the reasonableness associated with a skeptic?

Clem Miller: 57:46

So I mean what you're saying is that after the elections are over, things might settle down. Is that what you're suggesting?

Steve Davenport: 58:13

either the House or the Senate will continue to be controlled by Republicans and even if the president is winning against Biden, he's going to have less power and he's going to be a lame duck. Therefore, it's going to not be as big an event as everybody has made it up to, because I think that people are talking life or death.

Steve Davenport: 58:26

I want to move to Canada if one of these people wins right, and I'm not sure I would take all my money out of the market because I think we have great companies and those great companies know how to operate, so you know whether it's Trump.

Clem Miller: 58:43

So if you you know putting it that way, you know I'm not letting it change my overall you know investment strategy of uh, of investing in, uh in companies and staying mostly invested and so on. So I don't see any reason to change that and you know I will let um you know. If I ever do, I'll let everybody know, either through this podcast or through posting on LinkedIn. Uh, now I'm staying where I am in terms of being invested in the stock market. I don't see any reason to change that right now. That could change, you know, if things it could always change.

Steve Davenport: 59:24

I'm just saying that I think that this messy middle might be how we kind of go along to a new. I mean, in 28, we're going to have something new, right, I think? Unless you know, we decide to give no term limits or something. You know, something crazy happens. But I think that overall, there is still a possibility in terms of these candidates might not make it to November, which I still hold out hope for, because I think that being replaced by anyone in their party would probably make it a more normal election and would start to move our politics back towards a more reasonable level.

Clem Miller: 1:00:05

Well, I do, I do agree with you, but I just don't see it. Well, I do, I do agree with you, but I just don't see it OK.

Steve Davenport: 1:00:11

so this is the point where we say is there something we're not thinking about doing that we should be thinking about for our portfolios as we wrap up what we see for the second half of 24? What do you see as something that maybe isn't on the headlines and very out there?

Clem Miller: 1:00:33

that could be something you need to think about in terms of the second half, clint. Well, I'd like to think that I've thought about everything um and uh, and I I have thought about about you know a number of these things, but I, you know a number of these things, but I, you know.

Clem Miller: 1:00:48

I think that you know. I think one thing to potentially worry about is you know yet another region of the world presenting a conflict for us. You know, for example, mexico. You know something a little closer to our borders. You know, for example, mexico. You know something a little closer to our borders Mexico, central America. You know larger migration flows which could cause, you know, political upheaval.

Clem Miller: 1:01:25

You know you've already seen talked about the European elections a couple of podcasts ago and about how there was a shift from the left to the right. Um, you could have more. Um, you could have more right-wing leadership in various countries. Um, you know which you know could create a right-wing tilt. You know, in many, many different countries. Uh, so I think, I think that's, that's something to watch out for. May not be second half of uh, of 2024, but uh, I think it's, I think it should be a concern. That we should keep in mind. The whole relationship between migration and right-wing political shifts, I think is a significant issue. After all, if you look back at 2016, that was an influence in both the U S election and in, uh, in Brexit, this issue of migration and it really, it really hasn't gone away.

Steve Davenport: 1:02:37

Uh, we've been putting bandage on it, and I don't think we've really, and I think it's it's bothersome in many of this. You know many of these economies.

Clem Miller: 1:02:46

Now I will give you, I will give, give you another. Here's an off the wall uh scenario, uh, that I don't think a lot of people are thinking about. I like off the wall, okay, and that would be the collapse of russia. Wow, and you know, I see, when you, when you look at Russia, you saw just a few days ago you saw a terrorist attack in the Russian Republic of Dagestan. You saw an earlier attack in the suburbs of Moscow at a shopping center. That was a few months ago, that was a few months ago. You saw what happened with the potential mutiny last year. And when you look at all those things, you think, well, just how stable is Russia itself itself? And if russia collapses internally, you know there could be a lot of chaos like who's gonna? Who's gonna end up in control of the nuclear weapons think about that one in control of the oil.

Clem Miller: 1:04:03

But who's going to be in control of the oil? Um, are we looking at 5, 6, 7, 8, 9, 10 new countries emerging from Russia, sort of a breakup of? Are we going to see Tatarstan, bashkortostan, dagestan, chechnya? Are we going to see all those become new countries? Are we going to see a new sort of terrorist state coming out of chechnya? Who knows right? I mean, there there would be a lot of chaos if, uh, if, putin fell no, I agree.

Steve Davenport: 1:04:39

I think that's a great um thing to put out there, because I think it's something that people aren't thinking about. And how would you take advantage?

Clem Miller: 1:04:47

of it. Um yeah, you're not going to see putin. You're not going to see putin fall, and there's going to be a Democratic election tomorrow. That's just not going to happen.

Steve Davenport: 1:05:02

No, I don't think so, Because if there was a more reasonable party controlling the influence and the use of oil, obviously I think it would be great for the oil as a piece of the economy in terms of stabilizing it. I think the Russia has destabilized oil to a degree that make it always run in a pretty wide range, Whereas, instead of 65 to 95, if we ran in the 70 to 75 range, I think a lot of people would feel much more comfortable about their industry results and earnings. So I think it's an interesting way to think about it. I mean, my one would be the banks. Recently, we had this Fed recommendation that the six large banks need to come up with better plans for how they would wind down their positions and derivatives, and they basically all had the same problem where they were making assumptions about how they would unwind derivatives in a time of chaos, and the Fed said, no, that's not really a reasonable plan. And so the fact that derivatives could cause this kind of event if something were to happen, event in something, if something were to happen is in my mind. You know, I don't know how we, I don't know how we establish our portfolio protection or an offsetting item that would help us if there was chaos in the banking sector, because I think that you know, on the democratic side, I think there's. You know Warren is still calling for them to become utilities, which I think they on the Democratic side, I think Warren is still calling for them to become utilities, which I think they've not quite become, but they're moving in that direction. And then I think we've got other people who would look at more independence in the banking and the strong survive and the weak.

Steve Davenport: 1:07:06

I can't see the Fed letting anybody fail. I see them. You know what they did in 08 and what they've done in the past. You know, I think Silicon Valley was such a surprise to them, which I think is ridiculous, because their own people said we have problems here, Houston, and they just ignored it. So I can't ignore what the Fed did with their recent survey and the fact that they recommended all six of these banks come up with better plans.

Steve Davenport: 1:07:38

So I don't see anybody talking about it and everybody seems to be. You know, we know that higher rates are making it harder and we know that there is going to be some easing coming, especially if there's a Biden administration, and we want to make that administration successful if they win. I don't know what will happen if Trump wins, and I think there's a reason to think about banks and a reason to think about Russia. I think those are both two good ideas that are kind of off the mainstream but still out there in terms of having an impact on the second half Anything else you want to say Scott, nope, I think that's it.

Clem Miller: 1:08:25

I think we've covered a lot of territory in this episode. Steve, that's it. I think we've covered a lot of territory in this episode, steve, yeah, okay.

Steve Davenport: 1:08:31

Well, I hope everybody has a great 4th of July. We appreciate all the support. Our last video with Dan Solon has done very well and we'd recommend you listen to it in terms of how to help the next generation find financial well-being and I think that as we get halfway through 24, we've been doing this now for about seven or eight months and we are close to you know. 40 videos, I mean 40 podcasts, and it's a. You know it's been a great ride, we really enjoyed it, and so I hope everybody rests over the fourth and gets ready for what will be a very interesting second half. Thank you very much and look forward to another episode of Skeptic's Guide to Investing.